Monday, 31 October 2016

The discussions about CETA, the trade agreement between Canada
and the European Union, have focused almost exclusively on two questions. They
are important but certainly not the most fundamental ones. In this article I first discuss these two
questions and then turn to the more fundamental question of how far we should
push globalization.

The first question at the center of the debate around CETA concerns
the way national regulations on environment, safety and health are made
consistent with each other. To make trade possible in a world where trading
partners have different rules about the environment, health and safety, a
procedure must be followed to make these rules mutually acceptable. When, for
example, two countries wish to trade in poultry, they must agree on what
constitutes a healthy chicken. The attitude of many opponents of CETA in Europe
is that European regulation is superior to the Canadian (or American in the
context of TTIP), and that as a result Canadian and American chicken are
suspect, if not poisonous. The implicit hypothesis of this attitude is that
European governments care more about the health and safety of their citizens
than the Canadian and American governments do about their citizens.

Such an attitude makes trade agreements very difficult. Moreover,
it is not based on facts. There is no reason to assume that European legislation
of health, safety and the environment is superior to the North American one. If
that were the case, the European regulators would long ago have curbed the
harmful emissions of rigged European-made diesel cars. They did not, the US authorities
did.

The second question at the forefront of the CETA negotiations
had to do with the legal procedures to resolve disputes between foreign
investors and national authorities. The CETA trade agreement, like many others,
provides that foreign investors who feel harmed by new environmental, health, and
safety regulations can turn to a special arbitration procedure. This is indeed
a problem. It would be better to accept the jurisdiction of national courts in these
matters, rather than allowing international investors to turn to special
arbitration courts. The feeling in many countries that this is an unacceptable
discrimination favoring mostly multinational corporations should be respected.
It is better to rely on the national courts to settle disputes. Yet I have the
impression that the opponents of CETA (and TTIP) have blown this problem out of
proportion, even arguing that the ratification of these trade agreements would
undermine the foundations of our democracy.

A more fundamental issue that arises here and which has not
sufficiently been addressed in the discussions around CETA has to do with the
question ofhow far we should push
globalization?

In my academic career I have always been an advocate of free
trade. Free trade provided the basis of the phenomenal material prosperity we
have achieved in Europe in the postwar period. It has also made it possible for
hundreds of millions of people, especially in Asia, to be pulled out of extreme
poverty and to live a decent life.

But it now appears that globalization reaches its limits. These
limits exist for two reasons. Firstly, there is the environmental limit. Globalization
leads to very strong forms of specialization. There is of course nothing wrong
with specialization as it provides the condition to create more material
welfare. But specialization also means that goods are transported around the
globe a lot. The lengthening of the value chains that has been made possible by
the reductions of trade tariffs means that the same goods can travel back and
forth between many countries before they achieve the final consumers. All this
transporting around creates large environmental costs (e.g. CO2 emissions) that
are not internalized in the price of the final product. As a result, the prices
of these products are too low and too much is produced and consumed of them.
Put differently, globalization has made markets freer but thesemarkets do not function properly, giving
incentives to produce goods that harm the environment.

When the proponents of CETA (and TTIP) argue that trade
agreements will lead to higher GDPs they are right, but they forget to say that
this will be accompanied by rising environmental costs. If we subtract the
latter from the former it is not certain that this leaves something positive.

The second limit of globalization has to do with the highly
unequal distribution of benefits and costs of globalization. Free trade creates
winners and losers. As argued earlier there are many winners of globalization
in the world. The most important winners are the hundreds of millions who used
to live in extreme poverty. There are also many winners in the industrial
countries, e.g. those that work for or are shareholders in exporting companies.
But there are also many losers. The losers are the millions of workers, mostly
in the industrialized countries, who lost their jobs or have seen their wages
decline. These are also the people that have to be convinced that free trade
will ultimately be good for them and their children. Not an easy task. If,
however, we fail to convince them the social consensus that existed in the
industrial world in favour of free trade and globalization will deteriorate
further.

The most effective way to convince the losers in the
industrial world that globalization is good for them is by reinforcing
redistributive policies, i.e. policies that transfer income and wealth from the
winners to the losers. This, however, is more easily said than done. The
winners have many ways to influence the political process aiming at preventing
this from happening. In fact since the start of the 1980s when globalization
became intense most industrial countries have weakened redistributive policies.
They have done this in two ways. First, they have lowered the top tax rates
used in personal income tax systems. Second, they have weakened the social
security systems by lowering unemployment payments, reducing job security and lowering
minimum wages. All this was done in the name of structural reforms and was
heavily promoted by the European authorities.

Thus, while globalization went full speed, industrial
countries reduced the redistributive and protective mechanisms that were set up
in the past to help those that were hit by negative market forces. It is no
surprise that these reactionary policies created many enemies of globalization,
that now turn against the policy elites that set these policies in motion.

I come back to the question I formulated earlier:
How far should we push globalisation My answer is that as long as we do not
keep in check the environmental costs generated by free trade agreements and as
long as we do not compensate the losers of globalisation or worse continue to
punish them for being losers, a moratorium on new free trade agreements should
be announced. This is not an argument to a return to protectionism. It is an
argument to stop the process of further trade liberalization until the moment
we come to grips with the environmental costs and with the redistributive
effects of free trade. This implies introducing more effective controls on CO2
emissions, raising the income tax rates of the top income levels and
strengthening social security systems in the industrialized countries.